Although demand for credit stabilized at the beginning of the year and in the second quarter more large and medium-sized companies negotiated new capital with their banks, there is still no sign of an economic recovery leading to a sustainable turnaround.
Taking out new loans is also difficult for companies in the current financial year. High interest rates, wage increases and cost increases as well as the more restrictive lending policy are inhibiting the desire for further loans.
×
In the second quarter of 2024, the proportion of small and medium-sized enterprises (SMEs) negotiating loans with banks rose slightly to 21.2 percent. However, this does not mean that the sideways trend at a low level that has been ongoing for two years has yet to be broken. This is only likely to change with an economic recovery. This, as well as the falling credit costs associated with monetary easing, will increase the willingness of SMEs to use more loans to cover their financing needs. This is the conclusion reached by the analysis house KfW Research in the KfW-Ifo credit hurdle for spring 2024, which was published in early August.
The quarterly survey of around 9,000 companies, including around 7,500 medium-sized companies with fewer than 500 employees, also showed that interest in fresh capital among large companies (LCs) was 32.9 percent. This figure exceeded the average since 2017 for the first time since summer 2020.
The bar for financing is raised again
However, the financing barriers have increased across all size classes. Among SMEs, 1.5 percent more companies (27.8 percent) found the lending policy of their bank or savings bank to be restrictive. “A setback after two declines in a row,” the study authors assessed the result. Among large enterprises, the share even rose by 5.1 to 25.8 percent. It thus even exceeds the peak from the energy crisis in 2022.
Economists blame the stagnating economic recovery, which is weighing on companies’ development prospects and creditworthiness, for the reluctance of financial service providers. However, a consolidation of the economic upturn could reduce credit constraints.
At the beginning of 2024, the lending business stabilized
Although new lending to companies and the self-employed was again below the previous year’s level at the beginning of 2024, it only fell by a single-digit 3.9 percent. In the two previous quarters, the decline was in the double-digit range.
The surprising growth of the German economy in the first quarter of 2024 and the end of the interest rate tightening cycle have stabilized the lending business, write the KfW economists in their July credit market outlook. Nevertheless, high interest rates, wage increases and cost increases made the recovery difficult.
Less demand for investment financing
However, the need for investment financing fell at the start of the year. Nominal investment spending shrank by 0.9 percent compared to the previous quarter. The study authors concluded that uncertain economic prospects and price increases had a greater impact on investment activity than on financing costs. They assume that future investments will again provide greater support for credit demand, although the influence of fixed asset investments and the general interest rate level on credit demand is already declining, according to the Bank Lending Survey (BLS).
For the first time in a year, companies needed more money from banks and savings banks for warehousing and operating resources. Despite a decline in corporate investments in the first quarter, rising investment spending is expected for the second quarter of 2024 due to improved sales expectations and a better business climate.
Companies prefer long-term loans
Corporate loan rates have been moving sideways since October 2023, with long-term loans remaining cheaper than short- and medium-term loans with a maturity of less than five years. This supported demand for long-term capital, while medium-term loans were avoided due to higher interest payments.
In June, the European Central Bank lowered its key interest rates for the first time in five years. However, this step had already been expected by the market. Whether there will be further interest rate cuts from September onwards is unclear due to the still too high inflation rate and strong wage growth. Observers assume that lending rates will tend to fall in the second half of the year as the inflation rate falls. This should improve financing conditions and support new business.
